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Each existing provider is assigned a capacity based on its supply for category and region in prior 3 years, with most recent year given most weight(one block of capacity is about 1 percent of total volume)

Each qualified new provider is assigned a capacity of 1 block (about 1 percent)

Variation: the number of blocks can vary from 100 to 200 depending on the product-region to allow for different market sizes and minimum efficient scales

Any provider may supply more than its capacity, but its capacity is assumed in matching supply and demand and in setting performance obligations

As soon as supply falls to 100 blocks or less, the clearing price is set at the exit bid of the bidder that caused supply to fall to 100 or less

Each bidder still in wins its capacity

If supply is less than 100 blocks, the blocks won is scaled up to 100/SupplyExample: If with supply at 101, a bidder with 10 blocks exits at $34 and supply falls to 91; the clearing price is $34; and block won are scaled-up by 100/91

If multiple bidders exit at the clearing price, then exits are accepted to minimize the shortfall from 100 blocks (larger bidders first in event of tie)

Variation: each year one-half of regions are auctioned with 2-year contracts

Shorter commitment period encourages flexibility and entry

In either case, contract commitment extends to term of agreement with individual patients

Example: In last month of contract, provider supplies hospital bed to patient under 12-month rental agreement; provider is committed to patient regardless of whether the provider wins a supply contract in the next round

A mock auction is conducted with all participants using the proposed rules and a commercial auction platform. Each team is given a specific business plan and asked to maximize profits. There are four steps:

Variation: each year one-half of regions are auctioned with 2-year contracts

Shorter commitment period encourages flexibility and entry

In either case, contract commitment extends to term of agreement with individual patients

Example: In last month of contract, provider supplies hospital bed to patient under 12-month rental agreement; provider is committed to patient regardless of whether the provider wins a supply contract in the next round

An analysis of the 359 contract winners by Invacare, the largest U.S. manufacturer of home medical equipment (and largest creditor to the HME community), found “34 Percent Medicare HME Bid Program Contractors Are Not Financially Viable ”

8.5 percent have credit limits < $10,000

5.4 percent are on credit hold

6.7 percent are so far behind that their accounts have been turned over for collections or legal process

Each winning bidder has an obligation to provide each product in the category and region

The obligation is fully met if the provider supplies at least the fraction of realized demand consistent with the blocks won in the commitment year (e.g., a winner of 8 blocks supplies at least 8 percent of realized demand)

An HME provider that does not meet its fraction of supply and has a record of not filling orders is penalized in proportion to the quantity not filled(no penalty if supply < capacity as long as orders are filled)

Participation in future auctions is limited for providers that fail to meet performance obligations